Item 1. Business
References herein to “the Company,” “Rush Enterprises,” “we,” “our” or “us” mean Rush Enterprises, Inc., a Texas corporation, and its subsidiaries unless the context requires otherwise.
Access to Company Information
We electronically file annual reports, quarterly reports, proxy statements and other reports and information statements with the SEC. You may read and copy any of the materials that we have filed with the SEC at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549. You may obtain information about the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our filings are also available to you on the SEC’s website at www.sec.gov.
We make certain of our SEC filings available, free of charge, through our website, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports. These filings are available as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Our website address is www.rushenterprises.com. The information contained on our website, or on other websites linked to our website, is not incorporated into this report or otherwise made part of this report.
General
Rush Enterprises, Inc. was incorporated in Texas in 1965 and consists of one reportable segment, the Truck Segment, and conducts business through its subsidiaries. Our principal offices are located at 555 IH 35 South, Suite 500, New Braunfels, Texas 78130.
We are a full-service, integrated retailer of commercial vehicles and related services. The Truck Segment includes the Company’s operation of a network of commercial vehicle dealerships under the name “Rush Truck Centers.” Rush Truck Centers primarily sell commercial vehicles manufactured by Peterbilt, International, Hino, Ford, Isuzu, Mitsubishi Fuso, IC Bus or Blue Bird. Through our strategically located network of Rush Truck Centers, we provide one-stop service for the needs of our commercial vehicle customers, including retail sales of new and used commercial vehicles, aftermarket parts sales, service and repair facilities, financing, leasing and rental, and insurance products.
Our Rush Truck Centers are principally located in high traffic areas throughout the United States. Since commencing operations as a Peterbilt heavy-duty truck dealer in 1966, we have grown to operate over 100 Rush Truck Centers in 22 states.
Our business strategy consists of providing solutions to the commercial vehicle industry through our network of commercial vehicle dealerships. We offer an integrated approach to meeting customer needs by providing service, parts and collision repairs in addition to new and used commercial vehicle sales and leasing, plus financial services, vehicle upfitting, CNG fuel systems and vehicle telematics products. We intend to continue to implement our business strategy, reinforce customer loyalty and remain a market leader by continuing to develop our Rush Truck Centers as we expand our product offerings and extend our dealership network through strategic acquisitions of new locations and opening new dealerships to enable us to better serve our customers.
Rush Truck Centers.
Our Rush Truck Centers are located in Alabama, Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Kansas, Kentucky, Missouri, Nevada, New Mexico, North Carolina, Ohio, Oklahoma, Pennsylvania, Tennessee, Texas, Utah and Virginia. The following chart reflects our franchises and parts, service and collision repair operations by location as of February 25, 2019:
Rush Truck Center Location
|
Commercial Vehicle
Franchise(s)
|
Truck
Sales
|
Parts
and
Service
|
Collision
Center
|
Alabama
|
|
|
|
|
Mobile
|
Peterbilt
|
Yes
|
Yes
|
Yes
|
Birmingham
|
None
|
Yes
|
Yes
|
No
|
Arizona
|
|
|
|
|
Flagstaff
|
Peterbilt
|
No
|
Yes
|
No
|
Phoenix
|
Peterbilt, Hino
|
Yes
|
Yes
|
Yes
|
Tucson
|
Peterbilt, Hino
|
Yes
|
Yes
|
No
|
Yuma
|
Peterbilt
|
Yes
|
Yes
|
No
|
California
|
|
|
|
|
Bakersfield
|
None
|
No
|
Yes
|
No
|
Fontana Heavy-Duty
|
Peterbilt
|
Yes
|
Yes
|
Yes
|
Fontana Medium-Duty
|
Peterbilt, Hino, Isuzu
|
Yes
|
Yes
|
No
|
Fontana Vocational
|
None
|
No
|
Yes
|
No
|
Long Beach
|
Peterbilt
|
No
|
Yes
|
No
|
Modesto
|
Ford
|
Yes
|
Yes
|
No
|
Pico Rivera
|
Peterbilt
|
Yes
|
Yes
|
Yes
|
San Diego
|
Peterbilt, Hino, Ford
|
Yes
|
Yes
|
No
|
Sylmar
|
Peterbilt
|
Yes
|
Yes
|
No
|
Whittier
|
Ford, Isuzu
|
Yes
|
Yes
|
No
|
Colorado
|
|
|
|
|
Colorado Springs
|
Peterbilt
|
Yes
|
Yes
|
No
|
Denver
|
Peterbilt, Ford, Isuzu
|
Yes
|
Yes
|
Yes
|
Greeley
|
Peterbilt
|
Yes
|
Yes
|
No
|
Pueblo
|
Peterbilt
|
Yes
|
Yes
|
No
|
Rush Truck Center Location
|
Commercial Vehicle Franchise(s)
|
Truck
Sales
|
Parts
and
Service
|
Collision
Center
|
|
|
|
|
|
Florida
|
|
|
|
|
Haines City
|
Peterbilt
|
Yes
|
Yes
|
Yes
|
Jacksonville
|
Peterbilt, Hino
|
Yes
|
Yes
|
No
|
Lake City
|
Peterbilt
|
Yes
|
Yes
|
No
|
Orlando Heavy-Duty
|
Peterbilt, Isuzu
|
Yes
|
Yes
|
No
|
Orlando Light & Medium-Duty
|
Ford
|
Yes
|
Yes
|
No
|
Orlando North
|
Isuzu
|
Yes
|
Yes
|
No
|
Orlando South
|
Isuzu
|
Yes
|
Yes
|
No
|
Tampa
|
Peterbilt
|
Yes
|
Yes
|
No
|
Georgia
|
|
|
|
|
Atlanta
|
International, Hino, Isuzu, IC Bus
|
Yes
|
Yes
|
No
|
Atlanta Bus Center
|
IC Bus
|
Yes
|
Yes
|
Yes
|
Adairsville
|
International
|
No
|
Yes
|
No
|
Augusta
|
International, IC Bus
|
Yes
|
Yes
|
No
|
Blackshear
|
International, IC Bus
|
Yes
|
Yes
|
No
|
Columbus
|
International, Isuzu, IC Bus
|
Yes
|
Yes
|
No
|
Doraville
|
International, Hino, Isuzu, IC Bus
|
Yes
|
Yes
|
No
|
Gainesville
|
International, IC Bus
|
Yes
|
Yes
|
No
|
Macon
|
International
|
Yes
|
Yes
|
No
|
Savannah
|
IC Bus
|
Yes
|
Yes
|
No
|
Smyrna
|
International, Hino, Isuzu, IC Bus
|
Yes
|
Yes
|
No
|
Tifton
|
International, IC Bus
|
Yes
|
Yes
|
No
|
Valdosta
|
International
|
Yes
|
Yes
|
No
|
Idaho
|
|
|
|
|
Boise
|
International, Hino, IC Bus
|
Yes
|
Yes
|
Yes
|
Idaho Falls
|
International, IC Bus
|
Yes
|
Yes
|
Yes
|
Lewiston
|
International
|
Yes
|
Yes
|
No
|
Twin Falls
|
International
|
Yes
|
Yes
|
No
|
Illinois
|
|
|
|
|
Bloomington
|
International, Hino
|
Yes
|
Yes
|
No
|
Carol Stream
|
International
|
Yes
|
Yes
|
No
|
Champaign
|
International
|
Yes
|
Yes
|
Yes
|
Chicago
|
International
|
Yes
|
Yes
|
Yes
|
Effingham
|
International
|
Yes
|
Yes
|
Yes
|
Huntley
|
International
|
Yes
|
Yes
|
No
|
Joliet
|
International
|
Yes
|
Yes
|
No
|
Quincy
|
International
|
Yes
|
Yes
|
No
|
Springfield
|
International
|
Yes
|
Yes
|
Yes
|
Indiana
|
|
|
|
|
Gary
|
International
|
Yes
|
Yes
|
No
|
Indianapolis
|
International
|
Yes
|
Yes
|
Yes
|
Kansas
|
|
|
|
|
Kansas City
|
Hino, Isuzu
|
Yes
|
Yes
|
No
|
Kentucky
|
|
|
|
|
Bowling Green
|
Peterbilt
|
Yes
|
Yes
|
No
|
Missouri
|
|
|
|
|
St. Peters
|
International
|
Yes
|
Yes
|
No
|
St. Louis
|
International
|
Yes
|
Yes
|
No
|
Nevada
|
|
|
|
|
Las Vegas
|
Peterbilt
|
Yes
|
Yes
|
No
|
New Mexico
|
|
|
|
|
Albuquerque
|
Peterbilt
|
Yes
|
Yes
|
Yes
|
Farmington
|
Peterbilt
|
No
|
Yes
|
No
|
Las Cruces
|
Peterbilt
|
Yes
|
Yes
|
No
|
Rush Truck Center Location
|
Commercial Vehicle Franchise(s)
|
Truck
Sales
|
Parts
and
Service
|
Collision
Center
|
|
|
|
|
|
North Carolina
|
|
|
|
|
Asheville
|
International
|
Yes
|
Yes
|
No
|
Charlotte
|
International, Hino, Isuzu
|
Yes
|
Yes
|
Yes
|
Hickory
|
International
|
Yes
|
Yes
|
No
|
Ohio
|
|
|
|
|
Akron
|
International, IC Bus
|
Yes
|
Yes
|
No
|
Cincinnati
|
International, IC Bus, Isuzu, Ford, Mitsubishi Fuso
|
Yes
|
Yes
|
Yes
|
Cleveland
|
International, IC Bus
|
Yes
|
Yes
|
No
|
Columbus
|
International, IC Bus, Isuzu(1)
|
Yes
|
Yes
|
No
|
Dayton
|
International, IC Bus, Isuzu
|
Yes
|
Yes
|
No
|
Lima
|
International, IC Bus
|
Yes
|
Yes
|
No
|
Oklahoma
|
|
|
|
|
Ardmore
|
Peterbilt
|
Yes
|
Yes
|
No
|
Oklahoma City
|
Peterbilt, Hino, Ford, Isuzu
|
Yes
|
Yes
|
Yes
|
Tulsa
|
Peterbilt, Hino
|
Yes
|
Yes
|
Yes
|
Pennsylvania
|
|
|
|
|
Greencastle
|
None
|
Yes
|
Yes
|
No
|
Tennessee
|
|
|
|
|
Memphis
|
None
|
Yes
|
Yes
|
No
|
Nashville
|
Peterbilt
|
Yes
|
Yes
|
Yes
|
Texas
|
|
|
|
|
Abilene
|
Peterbilt
|
Yes
|
Yes
|
No
|
Amarillo
|
Peterbilt
|
Yes
|
Yes
|
No
|
Austin
|
Peterbilt, Hino, Isuzu, Blue Bird, Micro Bird, Elkhart
|
Yes
|
Yes
|
No
|
Austin North
|
Peterbilt
|
No
|
Yes
|
No
|
Beaumont
|
Peterbilt
|
Yes
|
Yes
|
No
|
Brownsville
|
Peterbilt, Elkhart
|
Yes
|
Yes
|
No
|
College Station
|
Peterbilt
|
Yes
|
Yes
|
No
|
Corpus Christi
|
Peterbilt, Hino, Isuzu, Blue Bird, Elkhart
|
Yes
|
Yes
|
No
|
Cotulla
|
Peterbilt
|
No
|
Yes
|
No
|
Dalhart
|
Peterbilt
|
No
|
Yes
|
No
|
Dallas Heavy-Duty
|
Peterbilt, Blue Bird, Micro Bird, Elkhart
|
Yes
|
Yes
|
Yes
|
Dallas Medium-Duty
|
Peterbilt, Hino,
Blue Bird, Micro Bird, Elkhart
|
Yes
|
Yes
|
No
|
Dallas Light & Medium-Duty
|
Ford, Isuzu
|
Yes
|
Yes
|
No
|
El Paso
|
Peterbilt, Hino, Isuzu
|
Yes
|
Yes
|
Yes
|
Fort Worth
|
Peterbilt, Blue Bird, Micro Bird, Elkhart
|
Yes
|
Yes
|
No
|
Houston
|
Peterbilt, Hino
|
Yes
|
Yes
|
Yes
|
Houston Bus Center
|
Blue Bird, Micro Bird, Elkhart
|
Yes
|
Yes
|
No
|
Houston Medium-Duty
|
Peterbilt, Hino
|
Yes
|
Yes
|
No
|
Laredo
|
Peterbilt, Blue Bird, Micro Bird, Elkhart
|
Yes
|
Yes
|
Yes
|
Lubbock
|
Peterbilt
|
Yes
|
Yes
|
No
|
Lufkin
|
Peterbilt, Blue Bird, Micro Bird, Elkhart
|
Yes
|
Yes
|
Yes
|
Odessa
|
Peterbilt
|
Yes
|
Yes
|
No
|
Pharr
|
Peterbilt, Hino, Blue Bird, Micro Bird, Elkhart
|
Yes
|
Yes
|
Yes
|
(1) Our Isuzu franchise is operated out of our Rush Truck Leasing - Columbus location.
|
Rush Truck Center Location
|
Commercial Vehicle Franchise(s)
|
Truck
Sales
|
Parts
and
Service
|
Collision
Center
|
San Antonio
|
Peterbilt, Hino, Blue Bird, Micro Bird, Elkhart
|
Yes
|
Yes
|
Yes
|
San Antonio Bus
|
Blue Bird, Micro Bird, Elkhart
|
Yes
|
Yes
|
Yes
|
Sealy
|
Peterbilt, Isuzu, Blue Bird, Micro Bird, Elkhart
|
Yes
|
Yes
|
No
|
Texarkana
|
Peterbilt, Hino, Isuzu,
Blue Bird, Micro Bird, Elkhart
|
Yes
|
Yes
|
No
|
Tyler
|
Peterbilt, Blue Bird, Micro Bird, Elkhart
|
Yes
|
Yes
|
No
|
Victoria
|
Peterbilt
|
Yes
|
Yes
|
No
|
Waco
|
Peterbilt, Hino, Isuzu,
Blue Bird, Micro Bird, Elkhart
|
Yes
|
Yes
|
No
|
Utah
|
|
|
|
|
Ogden
|
International, IC Bus
|
Yes
|
Yes
|
No
|
Salt Lake City
|
International, IC Bus, Mitsubishi Fuso
|
Yes
|
Yes
|
Yes
|
Springville
|
International, Mitsubishi Fuso
|
Yes
|
Yes
|
No
|
St. George
|
International, Mitsubishi Fuso
|
Yes
|
Yes
|
No
|
Virginia
|
|
|
|
|
Chester
|
International, Hino
|
Yes
|
Yes
|
No
|
Fredericksburg
|
International
|
Yes
|
Yes
|
No
|
Richmond
|
International
|
Yes
|
Yes
|
Yes
|
Le
asing and Rental Services.
Through certain of our Rush Truck Centers and several stand-alone Rush Truck Leasing Centers, we provide a broad line of product selections for lease or rent, including Class 4, Class 5, Class 6, Class 7 and Class 8 trucks, heavy-duty cranes and refuse vehicles. Our lease and rental fleets are offered on a daily, monthly or long-term basis. Substantially all of our long-term leases also contain a service provision, whereby we agree to service the vehicle through the life of the lease. The following chart reflects our leasing franchises by location:
Rush Truck
Leasing
Location
|
Franchise
|
Standalone or
in
a
Rush Truck Center
|
Alabama
|
|
|
Birmingham
|
PacLease
|
In RTC
|
Arizona
|
|
|
Phoenix
|
PacLease
|
Standalone
|
California
|
|
|
Fontana
|
PacLease
|
Standalone
|
Pico Rivera
|
PacLease
|
Standalone
|
San Diego
|
PacLease
|
In RTC
|
Sylmar
|
PacLease
|
In RTC
|
Colorado
|
|
|
Denver
|
PacLease
|
Standalone
|
Flor
ida
|
|
|
Orlando
|
PacLease
|
Standalone
|
Tampa
|
PacLease
|
In RTC
|
Jacksonville
|
PacLease
|
Standalone
|
Georgia
|
|
|
Macon
|
Idealease
|
In RTC
|
Idaho
|
|
|
Boise
|
Idealease
|
In RTC
|
Idaho Falls
|
Idealease
|
In RTC
|
I
llinois
|
|
|
Carol Stream
|
Idealease
|
In RTC
|
Chicago
|
Idealease
|
In RTC
|
Effingham
|
Idealease
|
In RTC
|
Huntley
|
Idealease
|
In RTC
|
Joliet
|
Idealease
|
In RTC
|
Springfield
|
Idealease
|
In RTC
|
Rush Truck
Leasing
Location
|
Franchise
|
Standalone or in a
Rush Truck Center
|
Indiana
|
|
|
Indianapolis
|
Idealease
|
In RTC
|
Gary
|
Idealease
|
In RTC
|
Missouri
|
|
|
St. Louis
|
Idealease
|
In RTC
|
St. Peters
|
Idealease
|
In RTC
|
New Mexico
|
|
|
Albuquerque
|
PacLease
|
Standalone
|
Nevada
|
|
|
Las Vegas
|
PacLease
|
In RTC
|
North Carolina
|
|
|
Charlotte
|
Idealease
|
Standalone
|
Ohio
|
|
|
Cincinnati
|
Idealease
|
Standalone
|
Cleveland
|
Idealease
|
Standalone
|
Columbus
|
Idealease
|
In RTC
|
Dayton
|
Idealease
|
In RTC
|
Oklahoma
|
|
|
Oklahoma City
|
PacLease
|
In RTC
|
Tennessee
|
|
|
Nashville
|
PacLease
|
In RTC
|
Texa
s
|
|
|
Austin
|
PacLease
|
Standalone
|
El Paso
|
PacLease
|
In RTC
|
Fort Worth
|
PacLease
|
Standalone
|
Houston
|
PacLease
|
Standalone
|
Houston NW
|
PacLease
|
In RTC
|
Odessa
|
PacLease
|
Standalone
|
San Antonio
|
PacLease
|
In RTC
|
Tyler
|
PacLease
|
Standalone
|
Virginia
|
|
|
Richmond
|
Idealease
|
Standalone
|
Norfolk
|
Idealease
|
Standalone
|
Utah
|
|
|
Salt Lake City
|
Idealease
|
Standalone
|
In addition to the locations in the above table, Rush Truck Leasing also provides full-service maintenance on customers’ vehicles at several of our customers’ facilities.
Financial and Insurance
Products
.
At our Rush Truck Centers, we offer third-party financing to assist customers in purchasing new and used commercial vehicles. Additionally, we sell, as agent through our insurance agency, a complete line of property and casualty insurance, including collision and liability insurance on commercial vehicles, cargo insurance and credit life insurance.
Other
Businesses
.
Perfection Equipment offers installation of equipment, equipment repair, parts installation, and paint and body repair at our location in Oklahoma City. Perfection Equipment specializes in up-fitting trucks used by oilfield service providers and other specialized service providers.
World Wide Tires stores operate in two locations in Texas. World Wide Tires primarily sells tires for use on commercial vehicles.
Custom Vehicle Solutions operates at locations in Denton, Texas and Greencastle, Pennsylvania. Custom Vehicle Solutions provides new vehicle pre-delivery inspections, truck modifications, natural gas fuel system installations, body and chassis upfitting and component installation.
The House of Trucks operates at locations in Dallas, Texas, Miami, Florida and Chicago, Illinois. The House of Trucks sells used commercial vehicles, new and used trailers and offers third-party financing and insurance products.
Momentum Fuel Technologies manufactures compressed natural gas fuel systems and related component parts for commercial vehicles at its facility in Roanoke, Texas.
Industry
See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Industry” for a description of our industry and the markets in which we operate.
Our Business Strategy
Operating Strategy.
Our strategy is to operate an integrated nationwide dealership network that provides service solutions to the commercial vehicle industry. Our strategy includes the following key elements:
|
●
|
Management by Dealership Units
. At each of our dealerships, we operate one or more of the following departments: new commercial vehicle sales, used commercial vehicle sales, financial services, parts, service or collision center. Our general managers measure and manage the operations of each dealership according to the specific departments operating at that location. We believe that this system enhances the profitability of all aspects of a dealership and increases our overall operating margins. Operating goals for each department at each of our dealerships are established annually and managers are rewarded for performance relative to these goals.
|
|
●
|
One-Stop Centers
. We have developed our larger commercial vehicle dealerships as “one-stop centers” that offer an integrated approach to meeting customer needs. We provide service, including collision repairs, parts, new and used commercial vehicles sales, leasing and rental, plus financial services including finance and insurance. We believe that this full-service strategy also helps to mitigate cyclical economic fluctuations because our parts, service and collision center operations (referred to herein collectively as “Aftermarket Products and Services”) at our dealerships generally tend to be less volatile than our new and used commercial vehicle sales.
|
|
●
|
Aftermarket Products and Services
. Our aftermarket capabilities include a wide range of services and products, including a fleet of mobile service units, mobile technicians who work in our customers’ facilities, a proprietary line of parts and accessories, factory-certified service for assembly services for specialized bodies and equipment. We believe that offering a variety of Aftermarket Products and Services at our dealerships and other locations allows us to meet the expanding needs of our customers. We continually strive to leverage our dealership facilities to offer more products and services to our customers.
|
|
●
|
Branding Program
. We employ a branding program for our new vehicle dealerships through distinctive signage and uniform marketing programs to take advantage of our existing name recognition and to communicate the standardized high quality of our products and reliability of our services throughout our dealership network.
|
Growth Strategy.
Through our strategic expansion and acquisition initiatives, we have grown to operate a large, multistate, full-service network of commercial vehicle dealerships. As described below, we intend to continue to grow our business by expanding our product and service offerings, through acquisitions in new geographic areas and by opening new locations to enable us to better serve our customers.
|
●
|
Expansion of Product and Service Offerings
. We intend to continue to expand our product lines within our existing locations by adding product categories and service capabilities that are both complementary to our existing product lines and well suited to our operating model. We will continue to take advantage of technological advances that will provide us with the opportunity to offer vehicle owners more aftermarket options and the ability to maximize the performance of vehicles in their fleets using telematics and other technologies.
|
|
●
|
Expansion Into New Geographic Areas
. We plan to continue to expand our dealership network by acquiring existing dealerships or opening new locations in areas where we do not already have locations. We believe the geographic diversity of our Rush Truck Center network has significantly expanded our customer base while reducing the effects of local economic cycles.
|
|
●
|
Open
New Rush Truck Centers
in Existing Areas of Operation
. We continually evaluate opportunities to increase our market presence by adding new Rush Truck Centers within our current franchises’ areas of operation.
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Management of Our Dealerships
Rush Truck Centers
Our Rush Truck Centers are responsible for sales of new and used commercial vehicles, as well as related parts and services.
Aftermarket Products and Services
. Revenues from Aftermarket Products and Services accounted for approximately $1,670.1 million, or 30.3%, of our total revenues for 2018, and 63.4% of our gross profit. Our Aftermarket Products and Services enable our sales function and are a source of recurring revenue. Rush Truck Centers carry a wide variety of commercial vehicle parts in inventory. Certain Rush Truck Centers also feature fully equipped service and collision center facilities, the combination and configuration of which varies by location, capable of handling a broad range of repairs on most commercial vehicles. Each Rush Truck Center with a service department is a warranty service center for the commercial vehicle manufacturers represented at that location, if any, and most are also authorized service centers for other vehicle component manufacturers, including Cummins, Eaton, Caterpillar and Allison. We also have mobile service technicians and technicians who staff our customers’ facilities upon request.
Our service departments perform warranty and non-warranty repairs on commercial vehicles. The cost of warranty work is generally reimbursed by the applicable manufacturer at retail commercial rates. Warranty-related parts and service revenues accounted for approximately $121.9 million, or 2.2%, of our total revenues for 2018. Additionally, we provide a wide array of services, including assembly services for specialized commercial vehicle bodies and commercial vehicle mounted equipment. Our goal is to provide our customers any service that they need related to their commercial vehicles.
As part of our leasing and rental operations, we also enter into contracts to provide full-service maintenance on certain customers’ vehicles. We had 1,094 vehicles under contract maintenance as of December 31, 2018, and 1,189 vehicles under contract maintenance as of December 31, 2017. The full-service maintenance revenues and retail service revenues are included as Aftermarket Products and Services revenues on our Consolidated Statements of Income.
New
Commercial Vehicle
Sales
. New commercial vehicle sales represent the largest portion of our revenues, accounting for approximately $3,198.5 million, or 58.1%, of our total revenues in 2018. Of this total, new Class 8 heavy-duty truck sales accounted for approximately $2,120.5 million, or 38.5%, of our total revenues for 2018, and 66.3% of our new commercial vehicle revenues for 2018.
Our Rush Truck Centers that sell new and used Class 8 heavy-duty trucks manufactured by Peterbilt or International may also sell medium-duty and light-duty commercial vehicles. Certain Rush Truck Centers sell medium-duty commercial vehicles manufactured by Peterbilt, Hino, Isuzu, Ford, International or Mitsubishi Fuso, buses manufactured by Blue Bird, IC Bus or Elkhart and light-duty commercial vehicles manufactured by Ford (see Part I, Item 1, “General –
Rush Truck Centers
” for information on which brands we sell at each Rush Truck Center). New medium-duty commercial vehicle sales, excluding new bus sales, accounted for approximately $841.1 million, or 15.3%, of our total revenues for 2018, and 26.3% of our new commercial vehicle revenues for 2018. New light-duty commercial vehicle sales accounted for approximately $86.7 million, or 1.6%, of our total revenues for 2018, and 2.7% of our new commercial vehicle revenues for 2018. New bus sales accounted for approximately $130.2 million, or 2.4%, of our total revenues for 2018, and 4.1% of our new commercial vehicle revenues for 2018.
A significant portion of our new commercial vehicle sales are to customers with large fleets of commercial vehicles. Because of the size and geographic scope of our Rush Truck Center network, our strong relationships with our fleet customers and our ability to manage large quantities of used commercial vehicle trade-ins, we are able to successfully market and sell to fleet customers nationwide. We believe that we have a competitive advantage over many dealerships because we can absorb multi-unit trade-ins often associated with fleet sales and effectively disperse the used commercial vehicles for resale throughout our dealership network. We believe that the broad range of products and services we offer to purchasers of commercial vehicles at the time of purchase and post-purchase results in a high level of customer loyalty.
Used
Commercial Vehicle
Sales
. Used commercial vehicle sales accounted for approximately $360.1 million, or 6.5%, of our total revenues for 2018. We sell used commercial vehicles at most of our Rush Truck Centers and also at our non-franchised used commercial vehicle facilities. We believe that we are well positioned to market used commercial vehicles due to our ability to recondition them for resale utilizing the service and collision center departments of our Rush Truck Centers and our ability to move used commercial vehicles between our dealerships as customer demand warrants. The majority of our used commercial vehicle inventory consists of commercial vehicles taken as trade-ins from new commercial vehicle customers or retired from our lease and rental fleet, but we also supplement our used commercial vehicle inventory by purchasing used commercial vehicles from third parties for resale, as market conditions warrant.
Vehicle
Leasing and Rental
. Vehicle leasing and rental revenues accounted for approximately $238.2 million, or 4.3%, of our total revenues for 2018. At our Rush Truck Leasing locations, we engage in full-service commercial vehicle leasing through PacLease and Idealease. Rental vehicles are also generally serviced at our facilities. We had 8,092 vehicles in our lease and rental fleet, including cranes, as of December 31, 2018, compared to 7,993 vehicles as of December 31, 2017. Generally, we sell commercial vehicles that have been retired from our lease and rental fleet through our used commercial vehicles sales operations. Historically, we have realized gains on the sale of used lease and rental commercial vehicles.
New and Used
Commercial Vehicle
Financing
and Insurance
. The sale of financial and insurance products accounted for approximately $20.6 million, or 0.4%, of our total revenues for 2018. Finance and insurance revenues have minimal direct costs and therefore, contribute a disproportionate share to our operating profits.
Many of our Rush Truck Centers have personnel responsible for arranging third-party financing for our product offerings. Generally, commercial vehicle finance contracts involve an installment contract, which is secured by the commercial vehicle financed, and require a down payment, with the remaining balance generally financed over a two-year to seven-year period. The majority of these finance contracts are sold to third parties without recourse to us. We provide an allowance for repossession losses and early repayment penalties that we may incur under these finance contracts.
We sell, as agent, a complete line of property and casualty insurance to commercial vehicle owners. Our agency, which operates at locations around the United States outside of our Rush Truck Centers, is licensed to sell commercial vehicle liability, collision and comprehensive, workers’ compensation, cargo, and credit life insurance coverage offered by a number of leading insurance companies. Our renewal rate in 2018 was approximately 86%. We also have licensed insurance agents at several Rush Truck Centers.
Sales and Marketing
Our established history of operations in the commercial vehicle business has resulted in a strong customer base that is diverse in terms of geography, industry and scale of operations. Our customers include regional and national truck fleets, corporations, local and state governments and owner-operators. During 2018, no single customer accounted for more than 10% of our sales by dollar volume. We generally promote our products and related services through direct customer contact by our sales personnel and advertising.
Facility Management
Personnel.
Each of our facilities is typically managed by a general manager who oversees the operations, personnel and the financial performance of the location, subject to the direction of a regional manager and personnel at our corporate headquarters. Additionally, each full-service Rush Truck Center is typically staffed by department managers, sales representatives and other employees, as appropriate, given the services offered. The sales staff of each Rush Truck Center is compensated on a salary plus commission, or a commission only basis, while department managers receive a combination of salary and performance bonus. We believe that our employees are among the highest paid in the industry, which enables us to attract and retain qualified personnel.
Compliance with Policies
and Procedures
.
Each Rush Truck Center is audited regularly for compliance with corporate policies and procedures. These internal audits objectively measure dealership performance with respect to corporate expectations in the management and administration of sales, commercial vehicle inventory, parts inventory, parts sales, service sales, collision center sales, corporate policy compliance and environmental and safety compliance matters.
Purchasing and Suppliers.
Because of our size, we benefit from volume purchases at favorable prices that permit us to achieve a competitive pricing position in the industry. We purchase our commercial vehicle inventory and proprietary parts and accessories directly from the applicable vehicle manufacturer, wholesale distributors, or other sources that provide the most favorable pricing. Most purchasing commitments are negotiated by personnel at our corporate headquarters. Historically, we have been able to negotiate favorable pricing levels and terms, which enable us to offer competitive prices for our products.
Commercial Vehicle Inventory Management
.
We utilize our management information systems to monitor the inventory level of commercial vehicles at each of our dealerships and transfer new and used commercial vehicle inventory among Rush Truck Centers as needed.
Parts D
istribution and Inventory Management.
We utilize a parts inventory distribution and management system that allows for the prompt transfer of parts inventory among various Rush Truck Centers. The transfer of inventory reduces delays in delivery, helps maximize inventory turns and assists in controlling problems created by overstock and understock situations. Our network is linked to our major suppliers for purposes of ordering parts and managing parts inventory levels. Automated reordering and communication systems allow us to maintain proper parts inventory levels and permit us to have parts inventory delivered to our locations, or directly to customers, typically within 24 hours of an order being placed.
Rece
nt Acquisitions
On December 14, 2017, we acquired certain assets of Transwest San Diego, LLC, which included a Ford truck franchise in San Diego, California. The transaction was valued at approximately $2.2 million, with the purchase price paid in cash.
Competition
There is, and will continue to be, significant competition both within our current markets and in new markets we may enter. We anticipate that competition between us and other dealership groups will continue to increase in our current markets and on a national level based on the following:
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the ability to keep customers’ vehicles operational, which is dependent on the accessibility of dealership locations;
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the number of dealership locations representing the manufacturers that we represent and other manufacturers, which impacts manufacturers’ ability to provide more consistent, higher quality service in a timely manner across their dealership networks;
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price, value, quality and design of the products sold; and
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our attention to customer service (including technical service).
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Our dealerships compete with dealerships representing other manufacturers, including commercial vehicles manufactured by Mack, Freightliner, Kenworth and Volvo. We believe that our dealerships are able to compete with other franchised dealerships, independent service centers, parts wholesalers, commercial vehicle wholesalers, rental service companies and industrial auctioneers in distributing our products and providing service because of the following: the overall quality and reputation of the products we sell; the “Rush” brand name recognition and reputation for quality service; the geographic scope of our dealership network; the breadth of commercial vehicles offered in our dealership network; and our ability to provide comprehensive Aftermarket Products and Services, as well as financing, insurance and other customer services.
Dealership Agreements
Peterbilt.
We have entered into nonexclusive dealership agreements with Peterbilt that authorize us to act as a dealer of Peterbilt heavy- and medium-duty trucks. Our Peterbilt areas of responsibility currently encompass areas in the states of Alabama, Arizona, California, Colorado, Florida, Kentucky, New Mexico, Nevada, Oklahoma, Tennessee and Texas. These dealership agreements currently have terms expiring between March 2019 and January 2022 and impose certain operational obligations and financial requirements upon us and our dealerships. Our dealership agreements with Peterbilt may be terminated by Peterbilt in the event that the aggregate voting power of the estate of W. Marvin Rush, W.M. “Rusty” Rush, other members of the Rush family and certain executives of the Company decreases below 22%. Sales of new Peterbilt commercial vehicles accounted for approximately 36.3% of our total revenues for 2018.
International.
We have entered into nonexclusive dealership agreements with Navistar that authorize us to act as a dealer of International heavy- and medium-duty trucks and, in certain markets, IC buses. Our Navistar areas of responsibility currently encompass areas in the states of Georgia, Idaho, Illinois, Indiana, Missouri, North Carolina, Ohio, Utah and Virginia. These dealership agreements currently have terms expiring between May 2020 and October 2023 and impose certain operational obligations and financial requirements upon us and our dealerships. Sales of new International commercial vehicles accounted for approximately 10.3% of our total revenues for 2018.
Other
Commercial Vehicle
Suppliers.
In addition to our dealership agreements with Peterbilt and Navistar, various Rush Truck Centers have entered into dealership agreements with other commercial vehicle manufacturers, including Blue Bird, Micro Bird and Mitsubishi Fuso, which currently have terms expiring between August 2019 and August 2023 and Ford, Hino and Isuzu, which have perpetual terms. These dealership agreements impose operating requirements upon us and require consent from the affected supplier for the sale or transfer of our franchise. Sales of new non-Peterbilt and non-International commercial vehicles accounted for approximately 11.5% of our total revenues for 2018.
Any termination or nonrenewal of our dealership agreements must follow certain guidelines established by both state and federal legislation designed to protect motor vehicle dealers from arbitrary termination or nonrenewal of franchise agreements. The federal Automobile Dealers Day in Court Act and certain other similar state laws generally provide that the termination or nonrenewal of a motor vehicle dealership agreement must be done in “good faith” and upon a showing of “good cause” by the manufacturer for such termination or nonrenewal, as such terms have been defined by statute and interpreted in case law.
Floor Plan Financing
Most of our commercial vehicle purchases are made on terms requiring payment to the manufacturer within 15 days or less from the date the commercial vehicles are invoiced from the factory. We finance the majority of all new commercial vehicle inventory and the loan value of our used commercial vehicle inventory under a credit agreement (the “Floor Plan Credit Agreement”) with BMO Harris Bank N.A. (“BMO Harris”). The Floor Plan Credit Agreement includes an aggregate loan commitment of $875.0 million. Borrowings under the Floor Plan Credit Agreement bear interest at an annual rate equal to (A) the greater of (i) zero and (ii) three month LIBOR rate, determined on the last day of the prior month, plus (B) 1.51% and are payable monthly. In addition, we are required to pay a monthly working capital fee equal to 0.16% per annum multiplied by the amount of voluntary prepayments of new and used inventory loans. Loans under the Floor Plan Credit Agreement for the purchase of used inventory are limited to $150.0 million. We may terminate the Floor Plan Credit Agreement at any time, although if we do so we must pay a prepayment processing fee equal to 1.0% of the aggregate revolving loan commitments if such termination occurs prior to the June 30, 2019 expiration date, subject to specified limited exceptions. On December 31, 2018, we had approximately $798.4 million outstanding under the Floor Plan Credit Agreement. The average daily outstanding borrowings under the Floor Plan Credit Agreement were $682.8 million during the year ended December 31, 2018. We utilize our excess cash on hand to pay down our outstanding borrowings under the Floor Plan Credit Agreement, and the resulting interest earned is recognized as an offset to our gross interest expense under the Floor Plan Credit Agreement.
In June 2012, we entered into a wholesale financing agreement with Ford Motor Credit Company that provides for the financing of, and is collateralized by, our Ford new vehicle inventory. This wholesale financing agreement bears interest at a rate of Prime plus 150 basis points minus certain incentives and rebates. As of December 31, 2018, the interest rate on the wholesale financing agreement was 7.0% before considering the applicable incentives. As of December 31, 2018, we had an outstanding balance of approximately $139.0 million under the Ford Motor Credit Company wholesale financing agreement.
P
roduct Warranties
The manufacturers we represent provide retail purchasers of their products with a limited warranty against defects in materials and workmanship, excluding certain specified components that are separately warranted by the suppliers of such components. We provide a warranty on our proprietary line of parts and related service and the fuel systems manufactured by Momentum Fuel Technologies. We also provide an extended warranty beyond the manufacturer’s warranty on new Blue Bird school buses that we sell in the State of Texas, as required by state law.
We generally sell used commercial vehicles in “as is” condition without a manufacturer’s warranty, although manufacturers sometimes will provide a limited warranty on their used products if such products have been properly reconditioned prior to resale or if the manufacturer’s warranty on such product is transferable and has not expired. Although we do not provide any warranty on used commercial vehicles, we offer for sale third-party warranties.
Trademarks
The trademarks and trade names of the manufacturers we represent, which are used in connection with our marketing and sales efforts, are subject to limited licenses included in our dealership agreements with each manufacturer. The licenses are for the same periods as our dealership agreements. These trademarks and trade names are widely recognized and are important in the marketing of our products. Each licensor engages in a continuous program of trademark and trade name protection. We hold registered trademarks from the U.S. Patent and Trademark Office for the following names used in this document: “Rush Enterprises,” “Rush Truck Center” and “Momentum Fuel Technologies.”
Employees
On December 31, 2018, we had 7,214 employees.
We have entered into collective bargaining agreements covering certain employees in Carol Stream, Illinois, which will expire on May 4, 2019, Joliet, Illinois, which will expire on May 7, 2020, and Chicago, Illinois, which will expire on May 8, 2021.
There have been no strikes, work stoppages or slowdowns during the negotiations of the foregoing collective bargaining agreements or at any time in the Company’s history, although no assurances can be given that such actions will not occur.
Seasonality
Our Truck Segment is moderately seasonal. Seasonal effects on new commercial vehicle sales related to the seasonal purchasing patterns of any single customer type are mitigated by the diverse geographic locations of our dealerships and our diverse customer base, including regional and national fleets, local and state governments, corporations and owner-operators. However, commercial vehicle Aftermarket Products and Services operations historically have experienced higher sales volumes in the second and third quarters.
Backlog
On December 31, 2018, our backlog of commercial vehicle orders was approximately $1,934.9 million, compared to a backlog of commercial vehicle orders of approximately $1,074.4 million on December 31, 2017. Our backlog is determined quarterly by multiplying the number of new commercial vehicles for each particular type of commercial vehicle ordered by a customer at our Rush Truck Centers by the recent average selling price for that type of commercial vehicle. We include only confirmed orders in our backlog. However, such orders are subject to cancellation. In the event of order cancellation, we have no contractual right to the total revenues reflected in our backlog. The delivery time for a custom-ordered commercial vehicle varies depending on the truck specifications and demand for the particular model ordered. We sell the majority of our new heavy-duty commercial vehicles by customer special order and we sell the majority of our medium- and light-duty commercial vehicles out of inventory. Orders from a number of our major fleet customers are included in our backlog as of December 31, 2018, and we expect to fill the majority of our backlog orders during 2019.
Environmental Standards and Other Governmental Regulations
We are subject to federal, state and local environmental laws and regulations governing the following: discharges into the air and water; the operation and removal of underground and aboveground storage tanks; the use, handling, storage and disposal of hazardous substances, petroleum and other materials; and the investigation and remediation of environmental impacts. As with commercial vehicle dealerships generally, and vehicle service, parts and collision center operations in particular, our business involves the generation, use, storage, handling and contracting for recycling or disposal of hazardous materials or wastes and other environmentally sensitive materials. We have incurred, and will continue to incur, capital and operating expenditures and other costs in complying with such laws and regulations.
Our operations involving the use, handling, storage and disposal of hazardous and nonhazardous materials are subject to the requirements of the federal Resource Conservation and Recovery Act, or RCRA, and comparable state statutes. Pursuant to these laws, federal and state environmental agencies have established approved methods for handling, storage, treatment, transportation and disposal of regulated substances with which we must comply. Our business also involves the operation and use of aboveground and underground storage tanks. These storage tanks are subject to periodic testing, containment, upgrading and removal under RCRA and comparable state statutes. Furthermore, investigation or remediation may be necessary in the event of leaks or other discharges from current or former underground or aboveground storage tanks.
We may also have liability in connection with materials that were sent to third-party recycling, treatment, or disposal facilities under the federal Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, and comparable state statutes. These statutes impose liability for investigation and remediation of environmental impacts without regard to fault or the legality of the conduct that contributed to the impacts. Responsible parties under these statutes may include the owner or operator of the site where impacts occurred and companies that disposed, or arranged for the disposal, of the hazardous substances released at these sites. These responsible parties also may be liable for damages to natural resources. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances or other materials into the environment.
The federal Clean Water Act and comparable state statutes require containment of potential discharges of oil or hazardous substances, and require preparation of spill contingency plans. Water quality protection programs govern certain discharges from some of our operations. Similarly, the federal Clean Air Act and comparable state statutes regulate emissions of various air emissions through permitting programs and the imposition of standards and other requirements.
The Environmental Protection Agency (“EPA”) and the National Highway Traffic Safety Administration (“NHTSA”), on behalf of the U.S. Department of Transportation, issued rules associated with reducing greenhouse gas (“GHG”) emissions and improving the fuel efficiency of medium and heavy-duty trucks and buses for model years 2021 through 2027. We do not believe that these rules will negatively impact our business, however, future legislation or other new regulations that may be adopted to address GHG emissions or fuel efficiency standards may negatively impact our business. Additional regulations could result in increased compliance costs, additional operating restrictions or changes in demand for our products and services, which could have a material adverse effect on our business, financial condition and results of operations.
We do not believe that we currently have any material environmental liabilities or that compliance with environmental laws and regulations will have a material adverse effect on our results of operations, financial condition or cash flows. However, soil and groundwater impacts are known to exist at some of our dealerships. Further, environmental laws and regulations are complex and subject to change. In addition, in connection with acquisitions, it is possible that we will assume or become subject to new or unforeseen environmental costs or liabilities, some of which may be material. In connection with our dispositions, or prior dispositions made by companies we acquire, we may retain exposure for environmental costs and liabilities, some of which may be material. Compliance with current or amended, or new or more stringent, laws or regulations, stricter interpretations of existing laws or the future discovery of environmental conditions could require additional expenditures by us, and those expenditures could be material.
Item 1A.
Risk Factors
An investment in our common stock is subject to certain risks inherent to our business. In addition to the other information contained in this Form 10-K, we recommend that you carefully consider the following risk factors in evaluating our business. If any of the following risks actually occur, our financial condition and results of operations could be materially adversely affected. If this were to happen, the value of our common stock could decline significantly, and you could lose all or part of your investment. This report is qualified in its entirety by these risk factors.
Risks Related to Our Business
We are
dependent upon PACCAR for the supply of Peterbilt trucks and parts, the sale of which generates the majority of our revenues.
At certain Rush Truck Centers, we operate as a dealer of Peterbilt trucks and parts pursuant to dealership agreements with Peterbilt, a division of PACCAR. We have no control over the management or operation of Peterbilt or PACCAR. During 2018, the majority of our revenues resulted from sales of trucks purchased from Peterbilt and parts purchased from PACCAR Parts. Due to our dependence on PACCAR and Peterbilt, we believe that our long-term success depends, in large part, on the following:
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our ability to maintain our dealership agreements with Peterbilt;
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the manufacture and delivery of competitively-priced, technologically current, high quality Peterbilt trucks in quantities sufficient to meet our requirements;
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the overall success of PACCAR and Peterbilt;
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PACCAR’s continuation of its Peterbilt division; and
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the maintenance of goodwill associated with the Peterbilt brand, which can be adversely affected by decisions made by PACCAR, Peterbilt and the owners of other Peterbilt dealerships.
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A negative change in any of the preceding, or a change in control of PACCAR, could have a material adverse effect on our operations, revenues and profitability.
We are dependent upon
Navistar
for the supply of
International
trucks and parts
and IC buses
and parts
,
the sale of which generate
a significant portion
of our revenues.
At certain Rush Truck Centers, we operate as a dealer of International trucks and parts and IC buses and parts pursuant to dealership agreements with International and IC Bus, each of which are divisions of Navistar. We have no control over the management or operation of International, IC Bus or Navistar. During 2018, a significant portion of our revenues resulted from sales of trucks purchased from International, buses purchased from IC Bus and parts purchased from Navistar. Due to our dependence on Navistar, International and IC Bus, we believe that our long-term success depends, in large part, on the following:
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our ability to maintain our dealership agreements with International and IC Bus;
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the manufacture and delivery of competitively-priced, technologically current, high quality International trucks and IC buses in quantities sufficient to meet our requirements;
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the overall success of Navistar; and
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the maintenance of goodwill associated with the International and IC Bus brands, which can be adversely affected by decisions made by Navistar and the owners of other International and IC Bus dealerships.
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A negative change in any of the preceding, or a change in control of Navistar, could have a material adverse effect on our operations, revenues and profitability.
Our dealership agreements may be terminable upon a change of control and we cannot control whether our controlling shareholder and management maintain their current
ownership
positions.
We have entered into nonexclusive dealership agreements with Peterbilt that authorize us to act as a dealer of Peterbilt trucks. Peterbilt may terminate our dealership agreements in the event of a change of control of the Company or if we violate any number of provisions in the dealership agreements. Under our Peterbilt dealership agreements, the following constitute a change of control: (i) with respect to the election of directors, the aggregate voting power held by the estate of W. Marvin Rush, W. M. “Rusty” Rush, Barbara Rush, Robin M. Rush, David C. Orf, James Thor, Martin A. Naegelin, Scott Anderson, Derrek Weaver, Steven Keller, Corey Lowe and Rich Ryan (collectively, the “Dealer Principals”) decreases below 22% (such persons controlled 39.2% of the aggregate voting power with respect to the election of directors as of December 31, 2018); or (ii) any person or entity other than the Dealer Principals and their respective associates, or any person or entity who has been approved in writing by PACCAR, owns common stock with a greater percentage of the voting power with respect to the election of our directors than the Dealer Principals and their respective associates, in the aggregate, or any person other than W.M. “Rusty” Rush, Robin M. Rush or any person who has been approved in writing by PACCAR holds the office of Chairman of the Board, President or Chief Executive Officer of the Company. We have no control over the transfer or disposition by the estate of W. Marvin Rush or W.M. “Rusty” Rush, or his estate, of their common stock. If the estate of W. Marvin Rush or W.M. “Rusty” Rush were to sell their Class B Common Stock or bequest their Class B Common Stock to a person or entity other than the Dealer Principals, or if their estates are required to liquidate their Class B Common Stock that they own directly or indirectly, to pay estate taxes or otherwise, the change of control provisions of the Peterbilt dealership agreements may be triggered, which would give Peterbilt the right to terminate our dealership agreements. If our dealership agreements with Peterbilt are terminated, we will lose the right to purchase Peterbilt products and operate as an authorized Peterbilt dealer, which would have a material adverse effect on our operations, revenues and profitability.
Our dealership agreements are non-exclusive and have relatively short terms which could result in nonrenewal or imposition of less favorable terms upon renewal.
Our dealership agreements generally do not provide us with exclusive dealerships in any of the areas of responsibility assigned in each dealer agreement. The manufacturers we represent could elect to create additional dealers in our areas of responsibility in the future, subject to restrictions imposed by state laws. While dealership agreements typically restrict dealers from operating franchised sales or service facilities outside their areas of responsibility, such agreements do not restrict sales or marketing activity outside the areas of responsibility. Accordingly, we engage in sales and other marketing activities outside our assigned areas of responsibility and other dealers engage in similar activities within our areas of responsibility.
Our dealership agreements with the manufacturers we represent have current terms expiring between March 2019 and October 2023. Upon expiration of each agreement, we must negotiate a renewal. Management expects that, consistent with in some cases decades of past practice, each of our dealership agreements will be renewed or otherwise extended before its termination date, provided that we do not breach any of the material terms of such agreement.
Management attempts to mitigate the risk that any manufacturer would not renew a dealership agreement by providing superior representation of each brand that we represent in each of our areas of responsibility. We deliver superior representation to our manufacturers by continuously investing substantial capital into our dealership locations, marketing and personnel. Senior members of our management team also communicate with management of the manufacturers that we represent on a regular basis, which we believe allows us to identify any potentially problematic issues as early as possible so that we can begin working on mutually agreeable solutions. In addition to the proactive steps that management takes, the risks that our dealership agreements will not be renewed are also mitigated by dealer protection laws that exist in each of the states that our dealerships are located. Many of these state dealer franchise laws restrict manufacturers’ ability to refuse to renew dealership agreements or to impose new terms upon renewal. However, to the extent such laws did allow for nonrenewal or the imposition of new terms, the relatively short terms would give manufacturers the opportunity to exercise such rights. Any nonrenewal or imposition of less favorable terms upon renewal could have an adverse impact on our business and in the case of the Peterbilt or Navistar dealership agreements, would have an adverse impact on our business.
If state dealer laws are repealed or weakened, our dealerships will be more susceptible to termination, nonrenewal or renegotiation of their dealership agreements.
We depend on our vehicle dealership agreements for a substantial portion of our revenues and profitability. State dealer laws generally provide that a manufacturer may not terminate or refuse to renew a dealership agreement unless it has first provided the dealer with written notice setting forth good cause and stating the grounds for termination or nonrenewal. Vehicle manufacturers’ lobbying efforts may lead to the repeal or revision of state motor vehicle dealer laws. If motor vehicle dealer laws are repealed or amended in the states in which we operate dealerships, the manufacturers we represent may be able to terminate our vehicle dealership agreements without providing advance notice, an opportunity to cure or a showing of good cause. Without the protection of state dealer laws, or if such laws are weakened, we will be subject to higher risk of termination or nonrenewal of our vehicle dealership agreements. Termination or nonrenewal of our vehicle dealership agreements would have a material adverse effect on our operations, revenues and profitability.
We may be required to obtain additional financing to maintain adequate inventory levels.
Our business requires new and used commercial vehicle inventories held for sale to be maintained at dealer locations in order to facilitate immediate sales to customers on demand. We generally purchase new and used commercial vehicle inventories with the assistance of floor plan financing agreements. Our primary floor plan financing agreement, the Floor Plan Credit Agreement, expires on June 30, 2019, and may be terminated without cause upon 120 days’ notice. In the event that our floor plan financing becomes insufficient to satisfy our future requirements or our floor plan providers are unable to continue to extend credit under our floor plan agreements, we would need to obtain similar financing from other sources. There is no assurance that such additional floor plan financing or alternate financing could be obtained on commercially reasonable terms.
Changes in interest rates could have a material adverse effect on our profitability.
Our Floor Plan Credit Agreement and some of our other debt are subject to variable interest rates. Therefore, our interest expense would rise with any increase in interest rates. A rise in interest rates may also have the effect of depressing demand in the interest rate sensitive aspects of our business, particularly new and used commercial vehicle sales, because many of our customers finance such purchases. As a result, a rise in interest rates may have the effect of simultaneously increasing our costs and reducing our revenues, which could materially affect our business, financial condition and results of operations. See “Quantitative and Qualitative Disclosures about Market Risk” for a discussion regarding our interest rate sensitivity.
Impairment in the carrying value of goodwill and other indefinite-lived intangible assets could negatively affect our operating results.
We have a substantial amount of goodwill on our balance sheet as a result of acquisitions we have completed. Approximately 99% of this goodwill is concentrated in our Truck Segment. The carrying value of goodwill represents the fair value of an acquired business in excess of identifiable assets and liabilities as of the acquisition date. Goodwill is not amortized, but instead is evaluated for impairment at least annually, or more frequently if potential interim indicators exist that could result in impairment. In testing for impairment, if the carrying value of a reporting unit exceeds its current fair value as determined based on the discounted future cash flows of the reporting unit, the goodwill is considered impaired and is reduced to fair value via a non-cash charge to earnings. Events and conditions that could result in impairment include weak economic activity, adverse changes in the regulatory environment, any matters that impact the ability of the manufacturers we represent to provide us with commercial vehicles or parts, issues with our franchise rights, or other factors leading to reductions in expected long-term sales or profitability. Determination of the fair value of a reporting unit includes developing estimates that are highly subjective and incorporate calculations that are sensitive to minor changes in underlying assumptions. Changes in these assumptions or a change in the Company’s reportable segments could result in an impairment charge in the future, which could have a significant adverse impact on our reported earnings. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Goodwill” for more information regarding the potential impact of changes in assumptions.
Our
business
is subject to a number of economic risks.
New and used commercial vehicle retail sales tend to experience periods of decline when general economic conditions worsen. We may experience sustained periods of decreased commercial vehicle sales in the future. Any decline or change of this type could materially affect our business, financial condition and results of operations. In addition, adverse regional economic and competitive conditions in the geographic markets in which we operate could materially adversely affect our business, financial condition and results of operations. Our commercial vehicle sales volume therefore may differ from industry sales fluctuations.
Economic conditions and the other factors described above also may materially adversely impact our sales of parts and repair services, and finance and insurance products.
We depend on relationships with
the manufacturers we represent and component
suppliers for sales incentives, discounts and similar programs which are material to our operations.
We depend on the manufacturers we represent and component suppliers for sales incentives, discounts, warranties and other programs that are intended to promote the sales of their commercial vehicles or our use of their components in the vehicles we sell. Most of the incentives and discounts are individually negotiated and not always the same as those made available to commercial vehicle manufacturers or our competitors. These incentives and discounts are material to our operations. A reduction or discontinuation of a commercial vehicle manufacturer’s or component supplier’s incentive program could have a material adverse effect on our profitability.
We are dependent on the ongoing success of the manufacturers we represent and adverse conditions affecting the manufacturers we represent may negatively impact our revenues and profitability.
The success of each of our dealerships is dependent on the manufacturers represented at each dealership. Our ability to sell new vehicles that satisfy our customers’ demands and replacement parts is dependent on the ability of the manufacturers we represent to produce and deliver new vehicles and replacement parts to our dealerships. Additionally, our dealerships perform warranty work for vehicles under manufacturer product warranties, which are billed to the appropriate vehicle manufacturer or component supplier as opposed to invoicing our customer. We generally have significant receivables from vehicle manufacturers and component suppliers for warranty and service work performed for our customers. In addition, we rely on vehicle manufacturers and component suppliers to varying extents for product training, marketing materials, and other items for our stores. Our business, results of operations, and financial condition could be materially adversely affected as a result of any event that has a material adverse effect on the vehicle manufacturers or component suppliers we represent.
The manufacturers we represent may be adversely impacted by economic downturns, significant declines in the sales of their new vehicles, labor strikes or similar disruptions (including within their major suppliers), rising raw materials costs, rising employee benefit costs, adverse publicity that may reduce consumer demand for their products (including due to bankruptcy), product defects, vehicle recall campaigns, litigation, poor product mix or unappealing vehicle design, governmental laws and regulations, or other adverse events. Our results of operations, financial condition or cash flows could be adversely affected if one or more of the manufacturers we represent are impacted by any of the foregoing adverse events.
Actions taken in response to continued operational losses by manufacturers we represent, including bankruptcy or reorganizations, could have a material adverse effect on our sales volumes and profitability. In addition, such actions could lead to the impairment of one or more of our franchise rights, inventories, fixed assets and other related assets, which in turn could have a material adverse effect on our financial condition and results of operations. Actions taken in response to continued operational losses by manufacturers we represent, including bankruptcy or reorganizations, could also eliminate or reduce such manufacturers’ indemnification obligations to our dealerships, which could increase our risk in products liability actions.
The dollar amount of our backlog, as stated at any given time, is not necessarily indicative of our future earnings.
As of December 31, 2018, our backlog of new commercial vehicle orders was approximately $1,934.9 million. Our backlog is determined quarterly by multiplying the number of new commercial vehicles for each particular type of commercial vehicle ordered by a customer at our Rush Truck Centers by the recent average selling price for that type of commercial vehicle. We only include confirmed orders in our backlog. However, such orders are subject to cancellation. In the event of order cancellation, we have no contractual right to the total revenues reflected in our backlog.
Reductions in backlog due to cancellation by a customer or for other reasons will adversely affect, potentially to a material extent, the revenue and profit we actually receive from orders projected in our backlog. If we were to experience significant cancellations of orders in our backlog, our financial condition could be adversely affected.
Our growth strategies may be unsuccessful if we are unable to
successfully execute our strategic initiatives or
identify and complete futur
e acquisitions.
Over the past few years, we have spent significant resources and efforts attempting to grow and enhance our Aftermarket Products and Services business and increase profitability through new business process management initiatives. These efforts require timely and continued investment in technology, facilities, personnel and financial and management systems and controls. We may not be successful in implementing all of the processes that are necessary to support any of our growth initiatives, which could result in our expenses increasing disproportionately to our incremental revenues, causing our operating margins and profitability to be adversely affected.
Historically, we have achieved a significant portion of our growth through acquisitions and we will continue to consider potential acquisitions on a selective basis. There can be no assurance that we will be able to identify suitable acquisition opportunities in the future or that we will be able to consummate any such transactions on terms and conditions acceptable to us. Moreover, there can be no assurance that we will obtain manufacturers’ consents to acquisitions of additional franchises.
Our dealerships are subject to federal, state and local environmental regulations that may result in claims and liabilities, which could be material.
We are subject to federal, state and local environmental laws and regulations governing the following: discharges into the air and water; the operation and removal of underground and aboveground storage tanks; the use, handling, storage and disposal of hazardous substances, petroleum and other materials; and the investigation and remediation of contamination. As with commercial vehicle dealerships generally, and service, parts and collision center operations in particular, our business involves the generation, use, storage, handling and contracting for recycling or disposal of hazardous materials or wastes and other environmentally sensitive materials. Any non-compliance with these laws and regulations could result in significant fines, penalties and remediation costs which could adversely affect our results of operations, financial condition or cash flows.
We may also have liability in connection with materials that were sent to third party recycling, treatment, or disposal facilities under federal and state statutes. Applicable laws may make us responsible for liability relating to the investigation and remediation of contamination without regard to fault or the legality of the conduct that contributed to the contamination. In connection with our acquisitions, it is possible that we will assume or become subject to new or unforeseen environmental costs or liabilities, some of which may be material. In connection with dispositions of businesses, or dispositions previously made by companies we acquire, we may retain exposure for environmental costs and liabilities, some of which may be material.
Further, environmental laws and regulations are complex and subject to change. Compliance with current or amended, or new or more stringent, laws or regulations, stricter interpretations of existing laws or the future discovery of environmental conditions could require additional expenditures by us which could materially adversely affect our results of operations, financial condition or cash flows.
Disruptions to our information technology systems and breaches in data security could adversely affect our business.
We rely upon our information technology systems to manage all aspects of our business, including processing and recording sales to, and payments from, customers, managing inventory, communicating with manufacturers and vendors and financial reporting. Any inability to manage these systems, including with respect to matters related to system and data security, privacy, reliability, compliance, performance and access, as well as any inability of these systems to fulfill their intended purpose within our business, could have an adverse effect on our business. In addition, in the ordinary course of business, we collect and store sensitive data and information, including our proprietary business information and that of our customers, suppliers and business partners, as well as personally identifiable information about our employees. Despite the security measures we have in place, our facilities and systems, and those of our third-party service providers, could be vulnerable to security breaches, computer viruses, lost or misplaced data, programming errors, human errors, acts of vandalism or other events. Any security breach or event resulting in the misappropriation, loss, or other unauthorized disclosure of confidential information, whether by us directly or our third-party service providers, could adversely affect our business operations, sales, reputation with current and potential customers, associates or vendors and result in litigation or regulatory actions, all of which could have a material adverse effect on our business and reputation.
Technological advances in the commercial vehicle industry, including drivetrain electrification or other alternative fuel technologies, in the long-term could have a material adverse effect on our business.
The commercial vehicle industry is predicted to experience change over the long-term. Technological advances, including with respect to drivetrain electrification or other alternative fuel technologies, could potentially have a material adverse effect on our parts and service business, as such vehicles are currently being described as potentially requiring less service and having fewer parts. The effect of these technological advances on our business is uncertain, as there are many factors that are unknowable at this time, including when such vehicles may be commercially available at price points that would lead to their widespread adoption. Similarly, although we are aware of ongoing efforts to facilitate the development of driverless commercial vehicles, the eventual timing of the availability of driverless commercial vehicles is uncertain due to regulatory requirements and additional technological requirements. The effect of driverless commercial vehicles on the commercial vehicle industry is uncertain and could include changes in the level of new and used commercial vehicles sales, the price of new commercial vehicles, and the role of franchised dealers, any of which could materially adversely affect our business, financial condition and results of operations.
Natural disasters and adverse weather events can disrupt our business.
Some of our dealerships are located in regions of the United States where natural disasters and severe weather events (such as hurricanes, earthquakes, fires, floods, tornadoes and hail storms) may disrupt our operations, which may adversely impact our business, results of operations, financial condition and cash flows. In addition to business interruption, our business is subject to substantial risk of property loss due to the significant concentration of property at dealership locations. Although we have substantial insurance to cover this risk, we may be exposed to uninsured or underinsured losses that could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Risks Related to Our Common Stock
We are controlled by
two
shareholder
s
and
their
affiliates.
Collectively, the estate of W. Marvin Rush and W. M. “Rusty” Rush and their affiliates own approximately 0.7% of our issued and outstanding shares of Class A Common Stock and 45.9% of our issued and outstanding Class B Common Stock. The estate of W. Marvin Rush and W.M. “Rusty” Rush collectively control approximately 36.6% of the aggregate voting power of our outstanding shares and voting power, which is substantially more than any other person or group. The interests of the estate of W. Marvin Rush and W.M. “Rusty” Rush may not be consistent with the interests of all shareholders, or each other. As a result of such ownership, the estate of W. Marvin Rush and W.M. “Rusty” Rush have the power to effectively control the Company, including the election of directors, the determination of matters requiring shareholder approval and other matters pertaining to corporate governance.
Our dealership agreements could discourage another company from acquiring
us
.
Our dealership agreements with Peterbilt impose ownership requirements on certain officers of the Company. All of our dealership agreements include restrictions on the sale or transfer of the underlying franchises. These ownership requirements and restrictions may prevent or deter prospective acquirers from acquiring control of us and, therefore, may adversely impact the value of our common stock.
Additionally, W. Marvin Rush and W.M. “Rusty” Rush granted Peterbilt a right of first refusal to purchase their respective shares of common stock in the event that they desire to transfer in excess of 100,000 shares in any 12-month period to any person other than an immediate family member, an associate or another Dealer Principal. However, in the case of the estate of W. Marvin Rush, certain shares of his Class B Common Stock of the Company are exempt from his rights of first refusal agreement. These rights of first refusal, the number of shares owned by the estate of W. Marvin Rush and W.M. “Rusty” Rush and their affiliates, the requirement in our dealership agreements that the Dealer Principals retain a controlling interest in us and the restrictions on the sale or transfer of our franchises contained in our dealer agreements, combined with the ability of the Board of Directors to issue shares of preferred stock without further vote or action by the shareholders, may discourage, delay or prevent a change in control without further action by our shareholders, which could adversely affect the market price of our common stock or prevent or delay a merger or acquisition that our shareholders may consider favorable.
Actions by our shareholders or prospective shareholders that would violate any of the above restrictions on our dealership agreements are generally outside of our control. If we are unable to renegotiate these restrictions, we may be forced to terminate or sell one or more of our dealerships, which could have a material adverse effect on us. These restrictions may also inhibit our ability to raise required capital or to issue our stock as consideration for future acquisitions.
Class A
Common Stock
has limited voting power.
Each share of Class A Common Stock ranks substantially equal to each share of Class B Common Stock with respect to receipt of any dividends or distributions declared on shares of common stock and the right to receive proceeds on liquidation or dissolution of us after payment of our indebtedness and liquidation preference payments to holders of any preferred shares. However, holders of Class A Common Stock have 1/20th of one vote per share on all matters requiring a shareholder vote, while holders of Class B Common Stock have one full vote per share.
Our Class B
Common Stock
has a low average daily trading volume. As a result, sales of our Class B
Common Stock
could cause the market price of our Class B
Common Stock
to drop, and it may be difficult for a stockholder to liquidate its position in our Class B
Common Stock
quickly without adversely affecting the market price of such shares.
The volume of trading in our Class B Common Stock varies greatly and may often be light. As of December 31, 2018, the three-month average daily trading volume of our Class B Common Stock was approximately 6,900 shares, with twenty-five days having a trading volume below 5,000 shares. If any large shareholder were to begin selling shares in the market, the added available supply of shares could cause the market price of our Class B Common Stock to drop. In addition, the lack of a robust resale market may require a shareholder to sell a large number of shares of our Class B Common Stock in increments over time to mitigate any adverse impact of the sales on the market price of our Class B Common Stock.